The State Bank of Pakistan provided relief to the
Interbank Market by injecting liquidity early in the week. Rates eased
off in the short term market while term rates remained firm, as banks
were quite inclined on maintaining levels close to the Treasury Bill
yields provided in the auction, but this sentiment also changed later.
With the announcement of the Pakistan Investment Bond auction, trading
for the paper started with demand for this when issued paper rising
sharply.

The overnight rate at 8.90% and the market short by
Rs. 17.30 billion the State Bank provided relief by injecting liquidity
in the two week and one month tenor at a uniform rate of 6.25%. This
caused a sudden ease in rates as banks managed to obtain funds to cross
them over the Eid period, a time of traditional outflows. Overnight
activity was conducted at 5.00% and rates crashed to lows of 1.00% on
the weekend. One, two week and one month offers fell off with heavy
trading being reported on the dealing system. It was on the last day of
the week that activity was conducted at 3.00%, 4.00% and 5.25% in these
tenors, respectively. With no major change expected three and six month
rates also eased off with trades being struck as low as 5.50% and 6.00%.
Sentiment of the dealers also caused activity in the long dates papers
as yields eased. January 2003 maturity papers were traded at yields
close to 6.60% while later in the week activity was also reported lower.
Furthermore trading in the ten year PIB to be issued on the 28th of
February also reflected the response to the 100 basis points downward
adjustment in the coupon rate on this bond. Trading started at a price
of 101.00 but within thirty minutes of the announcement of the auction,
having a target amount of Rs. 8.0 billion price touched 104.00, a yield
to maturity of 10.35%. It should be noted that the State Bank reduced
the coupon rate on the three, five and ten year papers to bring them to
9%, 10% and 11 % on these long term bonds, the third such adjustment
since the introduction of PIBs in December 2000.

The past week has reflected that the authorities are
there to provide liquidity to the interbank market when needed, even
after mopping it up rather aggressively. We feel that the downward
adjustment in the coupon rates on the long term bonds will only put
further pressure on rates that had risen after the T-Bill auction and
participation in the coming auction will yet again be a levels much
lower than the cut-off witnessed recently.